MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking
Statements
This
report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.
All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state
securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans,
strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements
regarding future economic conditions of performance; and statements of belief; and any statements of assumptions underlying any of the
foregoing. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied
by such forward-looking statements.
In
some cases, you can identify forward looking statements by terms such as “may,” “intend,” “might,”
“will,” “should,” “could,” “would,” “expect,” “believe,” “anticipate,”
“estimate,” “predict,” “potential,” or the negative of these terms. These terms and similar expressions
are intended to identify forward-looking statements. The forward-looking statements in this report are based upon management’s current
expectations and belief, which management believes are reasonable. However, we cannot assess the impact of each factor on our business
or the extent to which any factor or combination of factors, or factors we are aware of, may cause actual results to differ materially
from those contained in any forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements.
These statements represent our estimates and assumptions only as of the date of this report. Except to the extent required by federal
securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
You
should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number
of factors, including:
| ● | uncertainties relating to our
ability to establish and operate our business and generate revenue; |
| ● | uncertainties relating to general
economic, political and business conditions in China; |
| ● | industry trends and changes
in demand for our products and services; |
| ● | uncertainties relating to customer
plans and commitments and the timing of orders received from customers; |
| ● | announcements or changes in
our advertising model and related pricing policies or that of our competitors; |
| ● | unanticipated delays in the
development, market acceptance or installation of our products and services; |
| ● | changes in Chinese government
regulations; |
| ● | availability, terms and deployment
of capital, relationships with third-party equipment suppliers; and |
| ● | influences of COVID-19 on China’s
economy and society. |
Overview
Datasea
Inc. (the “Company” or “Datasea”) is a publicly traded entity with the ticker symbol DTSS on the Nasdaq Capital
Market. It was incorporated in Nevada on September 26, 2014. As a holding company with no material operations, the Company conducts a
majority of business through the organizations established in the People’s Republic of China, or the PRC, primarily by variable
interest entity (the “VIE”). The Company does not have any equity ownership of its VIE, instead it controls and receives economic
benefits of the VIE’s business operations through certain contractual arrangements.
The
vision of Datasea is to become a multinational conglomerate in a decade through the mission of innovating and providing advanced technology
to a wide range of business customers.
Shuhai
Information Technology Co., Ltd. (“Shuhai Beijing”), the VIE that holds its seven subsidiaries, possesses cutting-edge products
and solutions in three industries: 5G messaging, acoustic intelligence and smart city. Up to date, Shuhai Beijing and its subsidiaries
own 9 Patents and 53 Software Copyrights, with 12 patents applications pending in core technologies to empower and grow our business.
The
primary operational goals are to: (i) Provide best-in-class products and solutions in 5G messaging, acoustic intelligence and smart city;
(ii) maximize long-term sustainable growth of earnings and operating funds; (iii) generate cash flows and returns to the shareholders.
Such objectives will be accomplished by diversifying product portfolio, improving operating efficiency, achieving superior risk-adjusted
returns, prudently allocating capital, accelerating market reach and client acquisition.
The
metrics for promoting long-term sustainable growth and comparative advantages: (i) leveraging innovation to provide convenience and choice
to customers and commit to staying ahead of the emerging market trends. The R&D will be invested consistently and work with the best-in-class
research institutes to match the innovative drive with the highest standards of product research and quality. These efforts have been
taken into fruition that new launches and upgrades of products in 5G messaging, acoustic intelligence and smart city;(ii) being fast market-movers
with great execution, Datasea’s strategic business expansion to 5G messaging and acoustic intelligence all prove the Company is able to
identify great opportunities in the market and grasp them with execution;(iii) generating diversified revenue resources and continuous
business model improvements. Similar to the importance of diversification to investors, having a diversified product solution can also
offset risks and make the company more resilient. Datasea tapped into three different business areas but with great synergies among them.
Meanwhile, the Company provides a combination of software and hardware products and solutions which have the flexibility to meet with
clients of different needs, but also have the abilities to serve customers at scale. Datasea also keeps improving the business model for
having more resources to generate recurring revenues and improve profit margin.
5G
Messaging: Fueled by the promising market landscape and sound execution, 5G messaging business sales revenue achieved continuous breakthrough growth in the quarter compared to the same period in fiscal 2021, representing
a 12th consecutive month of growth. With the wide acceptance
of 5G applications in the nation, especially as China’s three major telecom operators have gradually launched preparations for the commercialization
of 5G messaging applications since the beginning of 2022, the popularity of 5G messaging-related services in the Chinese market has gradually
increased. According to the news published by Dao Insights on October 4, 2021, the 5G messaging market size of China is estimated to be
300 billion RMB ($46.54 billion) over the next 5 to 7 years.
Enhancements
are seen in the product development, customer acquisition, and business model. At present, the Company mainly provides institution customers
with three types of services: 5G SMS,5G Integrated message marketing cloud platform (5G IMMCP) and value-added services (5G multimedia
video SMS technology system, etc.).The 5G Integrated message marketing cloud platform (“5G IMMCP”), based on 5G message marketing
cloud platform (5G MMCP) and the current demand in the Chinese market, expands connection with existing clients through accesses such
as SMS, email, WeChat, applet, APP Push and third-party tools and manages users from different platforms all in one 5G IMMCP to form the
company’s unique product service capabilities and competitive advantages. As a leading service provider in the field of 5G messaging in
China, the number of companies that Datasea provides authorized development of 5G messaging for express delivery, catering, tourism, e-commerce,
finance, technology and other industries has increased from about 100 to nearly 200. Datasea’s Business model is built on the seamless
and efficient technical support for institutional customers assisting reach to end customers that resulting marketplace effect. This platform,
combined with a strong financial position, has continued to drive new customer growth among different regions in China.
As
the leader in the field of 5G messaging technical supporter in China’s express industry, the Company keeps building momentum and reinforce
leadership in the 5G messaging business. Shuhai Beijing cooperated with the National Engineering Laboratory for Logistics Information
Technology (“National Engineering Laboratory”) and drafted General Technical Requirements for 5G Messaging Application in
Express Industry in China; Shuhai Beijing is one of the directors in the 5G Message Working Group of the Academy of Information and Communications
of the Ministry of Industry and Information Technology, a CSP partner of the three major operators, a member of the China Communications
Enterprise Association, a member of China Express Association, and a provider of the Tencent Enterprise Microservice. Market recognitions
include: Shuhai Beijing assisted ZTO Express and completed the first order of 5G messaging service delivery in China’s express delivery
industry; awarded the third place in the 4th National “Blooming Cup” 5G Application Competition and the “Top 10 Enterprises
of 5G Messaging in 2021” by New 5G Messaging (New Media) and 5G New Business Center. Being a key player in the 5G messaging business
and having the wide product suitability for businesses in different industries may help Shuhai Beijing to continue its growth.
Acoustic
Intelligence: Compared with the wide recognition of 5G messaging market potential, Shuhai Beijing and its wholly-owned subsidiary, Shuhai
Jingwei (Shenzhen) Information Technology Co., Ltd. (“Shuhai Jingwei”), demonstrates its vision and ability to stay ahead
of the emerging market trends in acoustic intelligence. In this quarter, the Company unfolds the acoustic intelligence’s commercial
potential and exemplifies how to maximize usage of this technology alone or to upgrade products and solutions in various business areas
Shuhai Jingwei commits to tap acoustic intelligence’s full business potential and wields acoustic intelligence across industries
in meaningful ways. It sets the goal to become a leading technology and product provider in the field of acoustic intelligence in China
and worldwide.
Shuhai
Beijing has entered into partnerships with top notch institutions in this area and equipped itself with solid R&D capability. Recently,
Shuhai Beijing released China’s inaugural white paper “Industry Development and Technology Application of Acoustic Intelligence
in China,” with co-authors, Institute of Cloud Computing and Big Data, China Academy of Information and Communications Technology.
The white paper dives into the current and future application cases of acoustic intelligence in China and outlines the introduction of
acoustic intelligence, technology development, commercial applications and industrial outlook to provide technical insights and guide
industry development. According to the “Feasibility Study Report on China’s Acoustic Device Market 2021-2025” released
by Newsijie Research Center, China’s acoustic device market is expected to grow at a compound annual growth rate of 15.6% and reach
RMB 46 billion (approximately $7.23 billion) by 2025.
Shuhai
Jingwei, a wholly owned subsidiary of Shuhai Beijing, runs the acoustic intelligence business in the Bay Area of Canton-Hong Kong-Macao
where is an industry cluster for the benefit of improving the core technology, production, marketing, and logistics. To date, Shuhai Jingwei
has completed the technology development, product design, supply chain management and promotion plans for a series of acoustic hardware
products in six major industries and application areas, including but not limited to healthcare, medical beauty, environmental protection
and agriculture. The four flagship products, including Tianer voice recognition alarm, Ultrasonic sound sterilization and antivirus equipment,
Directional sound recognizer, and Brain refreshing acoustic equipment, are expected to be introduced to the market in fiscal year of 2022.
Among them, a new JV---Shuhai acoustic effect has jointly launched a logistics virus disinfection channel (the company provides the core
ultrasonic sterilization and antivirus components) with its partner institutions 99.99%, reaching the world advanced level.
In
order to access the top tier artificial intelligence technology and establish a world class branding, Datasea, the Nevada incorporated
company, will be localized in the US for multiple business functions such as design, creation, supply chain management, marketing, sales,
and capitalization. By doing so, it will be more efficient to connect with the R&D institutions or to team up with engineering talents
in Silicon Valley where the global innovation hub is for developing the most advanced products associated with the Patent Cooperation
Treaty to better solve clients’ demand. Also, America has the largest group of abundant consumers with the highest adoption rate
of new technology among the world which not only could boost up the revenue, but also can stimulate the value of intangible assets that
can help sales expansion all over the world in the coming future. More importantly, the management team strongly believes developing international
markets, including the United States, and building a global business structure can change the current single structure in which business
revenue is entirely derived from the Chinese market, and improve the single market’s ability to resist risks due to changes and
impacts such as policies, epidemics, and inflation, as well as investor information transparency and effective compliance risk reduction.
Datasea’s plan to enter the U.S market is pursuant to the growth strategy and commitment to tap acoustic intelligence’s full
business potential. The Company plans to introduce in the U.S. the Ultrasonic Sound Sterilization and Antivirus Equipment acoustic intelligence
products in agriculture as the first step of the global footprint expansion. The sterilization equipment market is expected to grow at
a CAGR of 12% from 2020 to reach 2027 for reaching $23.73 billion. The global smart agricultural market is expected to grow from USD12.9
billion in 2021 to USD 20.8 billion by 2026 at a CAGR of 10.1% according to MarketandMarkets.
Digital
Smart City: Shuhai Beijing possesses acoustic, non-visual, and visual intelligent algorithms (face recognition). The artificial
intelligence, machine learning, and data analysis capabilities are combined, so the solutions are not only providing visibility but also
identifying behavioral patterns. In addition, Shuhai Beijing and its subsidiary, Guozhong Haoze (Beijing) Technology Ltd. (“Guozhong
Haoze”) and Heilongjiang Xunrui Technology Co., Ltd (Heilongjiang Xunrui) establish five major business service systems which are
digital economy, digital government, digital culture, digital society, and digital ecology and using the three major middle-end platforms
to support modern digital city business. It has realized the three-dimensional perception of urban full-time space elements, the application
support of full-service systems, and the intelligent coordinated command of all scenarios, achieving refined urban governance, scientific
auxiliary decision-making, and digital industrial development. Shuhai Beijing, Guozhong Haoze and Heilongjiang Xunrui facilitates the
construction of China’s digital smart city by providing a digital smart city application platform that meets the needs of residential
communities, schools, and commercial enterprises in the Chinese market.
Recent Developments
The recent
business developments indicate the Company’s progress in general business developments, contracts acquisition, product upgrade,
marketing efforts and industry recognition.
1.A. Business developments:
As
the leader in the field of 5G messaging technical supporter in China market, Shuhai Beijing generates its revenue from 5G SMS, 5G
integrated message marketing cloud platform (“5G IMMCP”) and 5G Value-added service such as multi-media video
messaging technology system and advertisement. The business is based on an recurring revenue
model, such as 5G SMS which is based on the fee to charge on number of promotion messages have been sent in at least one year, as
customers are generally billed on a fixed basis each month for the duration of the signed contract
(one to three years in length. As a result, the recurring sales accounted
for about 73% of the total 5G SMS income. Institutional customers in the 5G messaging business grew rapidly during the
quarter. Among them, 5G SMS service added 12 new institutional customers, who are mainly from Guangdong Province and Guangdong
Province; and the 5G integrated Message Platform (5G IMMCP) business added two
institutional customers and completed two important industry applications in finance and healthcare respectively. At the same time,
the value-added service business continued to be good, including the development of financial middle-office and advertising
business.
Shuhai
Beijing and Shuhai Zhangxun are positioned to provide 5G marketing services in express and logistics, internet, catering, e-commerce,
finance, property management, and other industries in the Chinese market. Recently, the number of enterprises that engaged with Datasea’s
5G message authorization development increased from about 100 to nearly 200 which directly resulted in the Company becoming a leading
service provider in China. Blue chips customers included Zhongtong, Yuantong, Shentong, Shunfeng, Yunda and Rookie. Among that, Zhongtong
express was the one that completed the first delivery order placed through 5G messaging in China’s express industry. At the same time,
the Company led the major players in China’s express industry to jointly launch the formulation of 5G messaging standard for the sector.
Therefore, Datasea became the leader in the field of 5G messaging technical support in China’s express industry. In addition, in
the medical sector, during this quarter, the Company provided 5G information aggregation platform services to Huizhou Huiyang Dongfeng
general hospital, and assisted Dongfeng for reaching and transforming high-quality leads, maintained customer relations, as a great example
of 5G messaging application.
To
better promote business development and meet with the demand of customers, Shuhai Beijing and Shuhai Zhangxun have a unique sales model
which including 1) increasing professional sales team, focusing on expanding and maintaining the Company’s existing potential customer
needs and transforming them into deal transaction ; 2) Partner / broker mode, use the resources and contacts of partners to import more
potential demand and promote the order transformation of 5G messaging service of the company; 3) Joint marketing mode, using partner resources
to invite agents and end customers to participate in the promotion meeting led by the company’s business team to reach the signing of
agents or direct customers; 4) The enterprise key customer project cooperation mode promotes cooperation by cultivating enterprise key
customers and developing many projects that can be implemented by enterprise key customers, and can introduce the synergy of other products
or services of the company except 5G message service. The above business models have developed standard business processes to effectively
promote business progress.
In terms of marketing
and sales channel development, business partners and subsidiaries have been fully utilized to promote across the country. In addition,
long term cooperative relationship with major telecom operators and a number of provincial & municipal companies to expand product
applicability and customer coverage including Nanjing Branch of China Mobile Communications Group Jiangsu Co., Ltd., value-added
service operation center company responsible for its whole network business with China Telecom, one of China’s three major operators,
Zhejiang Jiaxing Branch of China Mobile and Jiangsu Branch of China Mobile.
1.B. Contracts
developments:
In
January 2022, Shuhai Zhangxun signed a $1,110,000 agreement with China Mobile Communications Group Jiangsu Co. Ltd., Nanjing Branch (“CMCG”).
The Company will provide 5G messaging services for the financial data middle-office project of Beijing Datang Gaohong Data Network Technology
Co., Ltd., including 5G IMMCP and private cloud platform integrated financial big data middle-office. The contract period is one year.
Approximately $1 million (RMB6.59 million) has been received as of January 27, 2022. This order not only is an important project in the
Company’s 5G messaging financial sector, but also heralds the approach of full commercialization of 5G messaging.
In
March 2022, Shuhai Zhangxun Information Technology CO., Ltd, a subsidiary of Shuhai Beijing singed a $345k purchase agreement to supply
5G messaging Aggregation services with Huizhou Huiyang Dongfeng General Hosipital Co., Ltd and Dongfeng’s affiliated entity, pursuant
to which Agreement Shuhai Zhangxun shal provide Dongfeng 5G messaging aggregation services to assist Dongfeng to reach and convert high-quality
leads and maintain their relationship with customers. In conjunction with the Agreement, Datasea should build and set up a customized
5G messaging aggregation platform for Dongfeng. Upon Datasea’s delivery of its 5G messaging aggregation services, Dongfeng should
be able to leverage this one-stop integrated messaging platform to provide a range of interactive options, including multi-channel distribution
with a unified ID, marketing materials delivery, and template-based management, to attract Dongfeng consumers’ attention and achieve
sustainable marketing growth of Dongfeng. Datasea’s 5G messaging aggregation platform already passed the user acceptance test and
was delivered to Dongfeng successfully. The cooperation with Dongfeng does not only demonstrate the great potential of 5G messaging application,
but also reinforces Datasea’s leading position in applying 5G messaging in different industries in China, including Express delivery
and Healthcare. Datasea’s 5G messaging SaaS model has also been put into use and we believe it will generate high gross margins
for Datasea and eventually become our core business model going forward.
In
March 2022, Heilongjiang Xunrui Technology Co., Ltd, a subsidiary of Shuhai Beijing, executed a purchase agreement with Jiangsu Xinrong
Network Technology Research Institution Co., Ltd., a company providing software development, artificial intelligence, and big data solutions.
In conjunction with the agreement, Xinrong will establish and operate information systems for 100 residential communities and has agreed
to purchase 5G messaging smart city solutions directly from Xunrui at a budget of RMB 500,000 (approximately USD 78,800) per residential
community. Xunrui estimated that the total value of this engagement would be RMB50 million (approximately USD 7.88 million) over the course
of the two-year agreement. The 5G messaging smart city solutions include the offerings of hardware equipment which adopts artificial intelligence-based
face recognition technology to assist in identifying the potential public security risk, and software which leverage cloud computing safety.
The 5G messaging smart city solutions will not only offer visibility but also help the property management team identify behavioral patterns,
generate objective, real-time qualitative measurement, and analysis. Eventually preventing safety risk and supporting proactively safety
management.
In
April 2022, Shuhai Zhangxun and Xinyuan Public Information Development Co., Ltd. (“Xinyuan public”) signed a “project cooperation
agreement for the introduction of 5G message key industry solution service providers” (the “agreement”) to jointly promote
the multi industry application of 5G message aggregation platform. Xinyuan Public is a wholly-owned subsidiary of China Telecom Co., Ltd.,
one of the three major operators in China. It is also the value-added service operation center of China Telecom that undertakes the operation
and daily continuous development of centralized Internet application services serving the whole network of China Telecom. According to
the agreement, Xinyuan Public Co., Ltd. makes overall arrangements to use the solutions, products and services provided by Shuhai Zhangxun;
Both parties shall establish a cooperative business system to ensure the healthy and sustainable development of the cooperative business
system; And continue to promote the in-depth cooperation between the two sides in 5G message business. Xinyuan Public will focus on promoting
the 5G message platform of Shuhai Zhangxun in the whole business system of China Telecom. This cooperation shows that the Company has
obtained the highest degree of recognition from China’s three major mobile operators. It focuses on promoting the 5G message solution
of Shuhai among operators in the whole region and system industry, which can effectively expand the applicability of products and the
coverage of customers. It not only shows the great potential of the company’s 5G message application scheme, but also indicates that the
company will obtain further expansion of potential customers and services, and achieve strong growth of 5G message business and revenue.
1.C.
Product upgrades:
Hangzhou
Shuhai Zhangxun Information Technology Co., Ltd, an affiliate of the Company, has made new efforts, including introducing a new product
launch to deepen the cooperation with operators to fully tap the 5G messaging market. The new efforts resolve the complexity in enabling
a full range of services across multiple environments and streamline the enterprises’ service transformation by delivering an integrated
but yet personalized 5G messaging experience. To this end, Shuhai Zhangxun has launched its new application module “Juchuan Smart
Push” to enable personalized delivery services, leveraging big data and data mining. Juchuan Smart Push integrates rich media messaging,
such as SMS and video SMS, to provide a range of interactive options and marketing materials that will help brands grab consumers’
attention and achieve sustainable marketing growth. Together with existed 5G message marketing cloud platform, and integrated 5G message
marketing cloud platform, Shuhai Zhangxun is able to offer a comprehensive portfolio messaging product to target the lucrative enterprise
segment with value-added features. Enterprises from different industries, including but not limited to tourism, retail, real estate, education
and training, leisure and entertainment, and express delivery, will all be able to reach, convert and maintain their buyer’s relationship
with Shuhai Zhangxun’s 5G messaging offerings.
1.D. Marketing
expansion:
Shuhai
Beijing and Shuhai Zhangxun have further developed relationships with the three major operators and a number of provincial and municipal
operators to expand product applicability and customer coverage. Including, 1) Shuhai Zhangxun cooperates with Nanjing Branch of China
Mobile Communications Group Jiangsu Co., Ltd. to provide financial customers with an integrated financial big data platform including
an aggregation platform 5G IMMCP and a private cloud platform; 2) It cooperates with the three major operators in China. 1. China
Telecom is responsible for its value-added business operation center company for its entire network business, and jointly promotes the
multi-industry application of the Shuhai 5G message aggregation platform; 3) At the same time, as the only 5G message authentication service
partner of China Mobile Zhejiang Jiaxing Branch, 5G messaging services can be provided directly to the operators’ existing customers;
4) Shuhai Zhangxun and China Mobile Jiangsu Branch have also accelerated their cooperation in 5G messaging, aiming to set a benchmark
for China’s express delivery industry and launch related services on the Jiangsu Mobile cloud platform. product, and plans to launch
a marketing campaign covering Chinese express companies in May 2022.
1.E. Industry
recognition:
In January, 2022,
Shuhai Zhangxun took the lead in organizing the overall technical requirements for 5G messaging applications in express delivery service
scenarios—that is, the first seminar of the drafting group for the 5G messaging group standard in China’s express delivery industry.
At this seminar, Shuhai Zhangxun and representatives from China Express Association, YTO Express, ZTO Express, STO Express and SF Express
and representatives of the three major operators in China delivered speeches together on the “5G News of Express Service Scenarios”.
Application General Technical Requirements” group standard version 1.0 seminars and exchanges to speed up the introduction of industry
standards and subsequent implementation in the express delivery industry.
Shuhai Zhangxun,
the subsidiary of Shuhai Beijing focusing on the 5G messaging business, was recently named the “Top 10 Enterprises of 5G Messaging
in 2021” by New 5G Messaging (New Media) and 5G New Business Center.Shuhai Zhangxun has become an innovative pioneer
of cross-platform product integration in the field of 5G messaging in China.Especially in the field of express delivery, Shuhai
Zhangxun set the 5G messaging application benchmark with ZTO express,and
the application has been highly recognized by the industry as an expample of “building a cross-platform product matrix in the field
of 5G messaging and leading the ecological integration of 5G messaging”.
2.A. Business
developments:
Shuhai
Beijing and Shuhai Jingwei commit to tap acoustic intelligence’s full business potential and wield acoustic intelligence across
industries in meaningful ways. In this quarter, the Company unfolded the commercial potential of acoustic intelligence, through direct
sales of acoustic intelligence powered disinfection equipment’s and agreements with different businesses to apply acoustic intelligence
in the areas such as automotive systems and smart home appliances. We are determined to become a leading technology and product provider
in the field of acoustic intelligence in China and worldwide. The research and development of technology play a vital role for us and
are what make us different.
During
the reporting period, a new holding subsidiary, Shuhai Acoustic Effect Technology Co., Ltd. (“Shuhai Acoustic Effect”) was established.
Shuhai Acoustics New Company will devote itself to the technological development and product design of smart products in the major fields
and scenarios such as health, medical care, agriculture, etc. supply chain management, promotion and sales. The core team of Shuhai Acoustics
New Company is composed of technical development and market talents with more than 10 years of industry experience in the field of domestic
acoustic intelligence in the field of ultrasonic and infrasonic acoustics. They are good at using sound technology and sound products
to solve practical problems in various industries. At the same time, a number of industry-renowned experts in the field of acoustic effects,
ultrasound, acoustic algorithms and electro-acoustic technology have been introduced to form an expert team to ensure that the joint venture
company and Shuhai Beijing maintain their technological leadership in the field of acoustic intelligence in China.
In
addition, Shuhai Acoustic Effects was established in Shenzhen, which will effectively utilize the industrial cluster
in the Guangdong-Hong Kong-Macao Bay Area, which is conducive to the establishment and improvement of the company’s technology, production,
marketing, supply chain and logistics system, and reduces the impact of global inflation on the supply chain. Ensure that the acoustic
intelligent hardware products are put on the market as planned. Shuhai acoustic effect has jointly launched a logistics virus disinfection
channel (the company provides the core ultrasonic sterilization and antivirus components) with its partner institutions 99.99%, reaching
the world advanced level.
Shuhai
Beijing and Shanghai Zhuifeng Automotive System Co., Ltd. recently reached a consensus on strategic cooperation in the field of acoustic
intelligent industry technology and application. Shanghai Zhuifeng Automotive System Co., Ltd. has domestic OEMs and front vehicle market
resources. At present, it is mainly engaged in the R & D and production of on-board acoustic systems and 5G v2x communication products.
The two parties jointly promote the acoustic intelligent module products in vehicle application scenarios, such as DMS (fatigue detection)
for sound awakening and expand the automobile related front loading market. In the future, the domestic market with more than 400 million
cars will be targeted.
In
summary, in order to quickly enter the market and increase market share, Shuhai Beijing, Shuhai Jingwei and Shuhai Acoustic Effects’s
development strategy, first of all, cooperates with large B-end customers to supply core acoustic disinfection modules, such as the cooperation
with Shanghai Chaifeng Automobile, and the company’s cooperation with future customers. we will supply 500,000 sets and 300,000
sets of core disinfection components for Guangdong Herbalife and Nanjing Xinrong respectively, which will enable the company’s supply
chain to mature as soon as possible; Datasea’s brand value in the field of acoustic intelligence, especially in the field of home health,
and higher gross profit; thirdly, the expansion of international markets in North America and South America, including the United States,
international development, and reduce the risk associated with the single market in China.
2.B.
Contracts developments:
Shuhai Acoustic
Effects Technology Co., Ltd, the subsidiary of Shuhai Beijing, has entered into a three-year collaboration agreement with Guangdong Canbo
Electrical Co., Ltd, a company in smart home household appliance. The cooperation will support the advancement of next-generation disinfection
cabinets with the integration of Shuhai acoustic effects’s innovative acoustic intelligence-enabled sterilization technology. Canbo
is the inventor of the world’s first household disinfection bowl cabinet. According to Jingcanmo Data, by November 2021, Canbo has
captured a dominant share of the disinfection cabinet market and accounted for nearly 40% of all online disinfection cabinet sales in
China. The company develops, produces, and sells disinfection bowl cabinets, water heaters, gas stoves, smoke machines, and other household
appliances. The new collaboration will focus on leveraging the respective strengths of Shuhai acoustic effects and Canbo to promote product
evolution and enhance user experience. Shuhai acoustic effects will provide technology called “high-frequency sound air coupling
microorganism and synergistic disinfection” to upgrade Canbo’s disinfection cabinet product and tackle the main problems of
current disinfection cabinet products such as heat generation and ozone odor, and effectively bring the disinfection time from three minutes
down to 10 seconds. Under the agreement terms, both companies will work closely and take on responsibilities for subsequent development
and commercialization activities. Once the technology integration and product development are finished and quality assurance is confirmed,
the product’s sales are expected to reach 500,000 units annually. The combination of Shuhai acoustic effects’s expertise in
acoustic intelligence and Canbo’s dominance in the disinfection cabinet market makes for an ideal partnership to advance disinfection
solutions for users. The partnership closely contributes to our goals to give users unique experiences that fundamentally enhance the
daily lives.
Shuhai Jingwei
has executed a purchase agreement with Jiangsu Xinrong Network Technology Research Institute Co., Ltd. (“Xinrong”), a company
providing software development, artificial intelligence, and big data solutions. In conjunction with the agreement, Xinrong is a supplier
of intelligent equipment and solutions to a wide range of institutional clients, including banks, universities, and hospitals. To better
serve its clients and tap into the needs for sterilization and disinfection solutions. Xinrong agrees to purchase Shuhai Jingwei’s
acoustic intelligence powered disinfection equipment such as model WPP-254PL-CP01and undertakes that the total value of this engagement
would be RMB 20 million (approximately USD 3.14 million) over the course of the two-year agreement. The acoustic intelligence powered
disinfection equipment features innovative ultrasonic sound sterilization that has proven to be able to purify air, reduce bacteria and
viruses such as COVID-19 and H1N1by over 99.9%.
2.C.
Product updates:
To date, Shuhai Beijing and Shuhai Jingwei
prepared four flagship products to unfold the commercial possibilities of acoustic intelligence in the most wanted areas like health,
security, and environment protection. The four flagship products are 1) Shuhai ultrasonic sound sterilization and antivirus equipment,
the first-ever sterilization and antivirus equipment that combines ultrasonic acoustic effect s with optics to address the Covid-19 sparked
disinfecting needs; 2) Shuhai Tianer voice recognition alarm, a product processing real-time sound data necessary to conduct early warning
analysis, and actively respond to the emergency incidents and threats; 3) Shuhai directional sound recognizer, a product tackle with noise
pollution and can be applied in personal and public situations; and 4) Shuhai refreshing directional sound device, a product help integrating
ultrasound, low frequency, electromagnetic waves, music, and voice interaction to deliver customizable experience good for well-being.
The four flagship products have produced samples, completed laboratory tests and user pilot tests, entered mass production to varying
degrees, and are expected to be introduced to the market in the fiscal year of 2022. Shuhai acoustic effect has jointly launched
a logistics virus disinfection channel (the company provides the core ultrasonic sterilization and antivirus components) with its partner
institutions 99.99%, reaching the world advanced level.
2.D. Market Expansion:
At present, relying
on the Shuhai Beijing, Shuhai Jingwei and Shuhai Acoustic Effects’s team’s deep contacts in the fields of express delivery, transportation
and agriculture in China, the team has reached a cooperation agreement with Guangdong Kangbao, a well-known leading enterprise of disinfection
cabinets in China, for 500000 sets of microbial disinfection function disinfection cabinets, and has formed cooperation intentions and
pilot projects with many logistics companies, ports, terminals, airports and high-speed railway stations in China, which will bring considerable
commercial income to the new company in the future.
Datasea has entered
into a one-year business cooperation agreement with Unicorner LLC, a company that possesses comparative advantages on supply chain
management such as procurement, logistic, warehousing, marketing, and sales on the sterilization industry in the United States. The Partnership
leverages the respective strengths of Datasea and Unicorner to create compelling value for both companies. Datasea will provide various
acoustic intelligence products and technical support to Uniconer who will utilize and share the over twenty years of experience in U.S
operations, internal expertise, and external resources to assist the Company’s product distribution primarily in America.
Datasea also engaged
one-year business agreement with ShenZhen New Route Network Technology and QueTal Compra respectively, which the Company believes
will help it to create synergies on promotion, sales, business development, branding, and localization, aiming to bolster Datasea’s
participation in the North and South America. The new collaboration will help the Company expand the scale and global footprint and integrate
New Route Network Technology and QueTal Compra into Datasea’s distribution process. New Route Network Technology utilizes over ten
years of experience in China and North America e-commerce industry and nearly twenty physical stores around the world to help clients
distribute products effectively. QueTal Compra is a fast-growing company with twenty-two physical stores and about 100 employees all over
South America including Peru, Argentina, Columbia, Bolivia, and Mexico. New Route Network Technology and QueTal Compra bridges domestic
and overseas markets to deliver streamlined logistics and enable Datasea to strengthen the customer value proposition.
2.F.
Industry recognition:
In
January, Shuhai Beijing released China’s inaugural white paper with co-authors, Institute of Cloud Computing and Big Data, China
Academy of Information and Communications Technology to uncover detailed facts and compelling analyses of the acoustic-intelligence technology,
commercial applications, and the industry outlook. Shuhai Beijing dives deeply into the current and future use cases of acoustic intelligence
in China and outlines the introduction of acoustic intelligence, technology development, commercial applications and industry outlook
to provide technical insights and guide industry development. In addition, China’s acoustic-intelligent industry is under rapid
expansion. In the future, acoustic intelligence will be more mature with extensive applications. With the integration of acoustic intelligence,
scenario-based solutions will be enhanced. Technological progress will unlock tremendous business opportunities and potentials in the
real economy.
3.A. Business
developments:
Shuhai Beijing,
Guozhong Haoze and Heilongjiang xunrui have visual intelligent algorithms such as face recognition, as well as cutting-edge acoustic and
non-visual intelligent algorithms. It combines artificial intelligence, machine learning and data analysis capabilities so that its solutions
not only provide visibility but also identify behavioral patterns. In addition, Shuhai Beijing, Guozhong Haoze and Heilongjiang xunrui
have established three major middle-end platforms that support modern digital smart city business: big data platform, IoT platform, and
digital twin. It has realized the three-dimensional perception of urban full-time and space elements, the application support of full-service
systems; the intelligent coordinated command of all scenarios, achieving refined urban governance, scientific auxiliary decision-making,
and digital industrial development. Shuhai Beijing, Guozhong Haoze and Heilongjiang xunrui will help the construction of China’s
digital smart city and continue to provide a digital smart city application platform that meets the needs of residential communities,
schools and commercial enterprises in the Chinese market.
Our
business is primarily based on a recurring revenue model, as our customers are generally billed on a fixed and recurring basis each month
for the duration of their contract, which is generally one to three years in length and thereafter. Shuhai Beijing, Guozhong Haoze
and Heilongjiang xunrui has a diversified client portfolio which makes our business model resilient.
Our non-recurring revenue primarily includes installation services related to an initial client deployment and the professional services
we provide. Clients are billed typically once, upon completion of the installation or the professional services work performed.
3.B. Contracts
developments:
In
Mrach 2022, Heilongjiang Xunrui Technology Co., Ltd, a subsidiary of the Chinese operating company contractually controlled by the Datasea,
has executed a purchase agreement with Jiangsu Xinrong Network Technology Research Institution Co., Ltd., a company providing software
development, artificial intelligence, and big data solutions. In conjunction with the agreement, Xinrong will establish and operate information
systems for 100 residential communities and has agreed to purchase 5G messaging smart city solutions directly from Xunrui at a budget
of RMB 500,000 (approximately USD 78,800) per residential community. Xunrui estimated that the total value of this engagement would be
RMB50 million (approximately USD 7.88 million) over the course of the two-year agreement. The 5G messaging smart city solutions include
the offerings of hardware equipment which adopts artificial intelligence-based face recognition technology to assist in identifying the
potential public security risk, and software which leverage cloud computing safety. The 5G messaging smart city solutions will not only
offer visibility but also help the property management team identify behavioral patterns, generate objective, real-time qualitative measurement,
and analysis. Eventually preventing safety risk and supporting proactively safety management.
3.C. Product
updates:
Shuhai Beijing and its subsidiaries
laid out a series of upgrades in:
1) IoT cloud platform 2.0 upgrade function.
Shuhai Beijing and its subsidiaries
have upgraded the Internet of Things platform 1.0 to a major version. In the new version 2.0, we have added the business capabilities
of the open data business center and third-party business users to access. Users can pass standardized registration approval and upload
their own. Hardware products and communication types and other related configurations, users can customize and set various equipment alarm
parameters and the platform provides an alarm interface. The IoT platform provides users with business transformation from a privatized
data center to a shared data pillar platform. Now, the 2.0 version of the Shuhai IoT platform has supported the access of the group’s
full line of equipment products and popular products in the market, and has provided multiple types of products under the group. The business
platform campus security cloud platform, smart community platform, campus dormitory management system, etc. provide massive data flow
processing and support.
2) Campus Security Cloud
In the campus security cloud system,
Shuhai Beijing and its subsidiaries have added the access management of the Internet of Things service gateway and the access management
of the video streaming media gateway. The addition of the two services provides more favorable terminal data push support for the Shuhai
security cloud platform. The two gateways can be packaged Complete sets of sales products for equipment sales, which can be combined with
our business application platform for sales. The campus security cloud video streaming service gateway can be sold as a device or can
be deployed locally in the form of a program. The video streaming function can provide localized video streaming services to the campus
security cloud platform, that is, users can deploy The device enables a localized video streaming cloud viewing experience. Various brands
of surveillance cameras are now supported.
| 4. | Factors that we
closely monitor and will be managed in a proactive manner |
Datasea
closely monitors the impact of the COVID-19 pandemic and global high inflation on our business and operations, including the impact on
our customers, suppliers and business partners. While we did not experience significant disruptions from the pandemic nor inflation as
of the date of this report, Datasea is taking preventive measures to manage our business. As Datasea mainly operates in China, and we
always pay great attention to supply chain and cost management. So far we haven’t seen the significant challenges arising from these areas
that would affect our business development and client acquisition. Meanwhile, Datasea has a diversified product portfolio, ranging from
5G messaging, acoustic intelligence and smart city, and in the form of software and hardware.Therefore, our business model is more resilient
and has diversified revenue resources. Other than that, as 5G messaging and acoustic intelligence are all emerging areas with high demand
and technology barriers, the company is positioned to have certain advantages in the market. Last but not least, the external environment
may even fuel the growth of our certain business. For example, the Ultrasonic Sound Sterilization and Antivirus Equipment, a acoustic
intelligence product, can benefit from the Covid-sparked sterilization equipment market growth.
During the quarter ended
March 31, 2022, Shuhai Beijing and its subsidiaries’ newly-registered software copyrights and patents were as follows:
Certification | |
Certificate No. |
Softcopy Campus
intelligent acoustic warning system V2.0 | |
Ruan Zhu Deng Zi No.8580724 |
Intelligent acoustic warning system V2.0 in healthcare environment | |
Ruan Zhu Deng Zi No.8580553 |
Intelligent acoustic warning system for public places V2.0 | |
Ruan Zhu Deng Zi No.8580552 |
Natatorium intelligent acoustic warning system V2.0 | |
Ruan Zhu Deng Zi No.8580686 |
Home Intelligent acoustic warning system V2.0 | |
Ruan Zhu Deng Zi No.8580685 |
Hotel intelligent acoustic warning system V2.0 | |
Ruan Zhu Deng Zi No.8580725 |
Patent | |
|
A multi-role login method of Android program based on SQlite database | |
Patent No.4842116 |
| |
|
The invention discloses an adaptive distributed audio alarm method and system | |
Patent No.4869071 |
Going Concern
The accompanying unaudited
condensed consolidated financial statements were prepared assuming the Company will continue as a going concern, which contemplates
continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. For the nine months
ended March 31, 2022 and 2021, the Company had a net loss of approximately $4.40 million and $3.05 million, respectively. For the three
months ended March 31, 2022 and 2021, the Company had a net loss of approximately $1.28 million and $1.20 million, respectively. The Company
had an accumulated deficit of approximately $16.46 million as of March 31, 2022, and negative cash flow from operating activities of approximately
$4.22 million and $3.06 million for the nine months ended March 31, 2022 and 2021, respectively. The historical operating results indicate
the Company has recurring losses from operations which raise the question related to the Company’s ability to continue as a going
concern. There can be no assurance the Company will become profitable or obtain necessary financing for its business or that it will be
able to continue in business. The unaudited condensed consolidated financial statements do not include any adjustments that might result
from the outcome of these uncertainties. On July 20, 2021, the Company sold 2,436,904 shares of common stock at $3.48 per share. The net
proceeds from the transactions were approximately $7,640,000, after deducting offering costs, and as of March 31, 2022, the Company had
cash of $1,628,750.
If deemed necessary, management
could raise additional funds by way of private or public offerings, or by obtaining loans from banks or others, to support the Company’s
research and development (“R&D”), procurement, marketing and daily operation. While management of the Company believes
in the viability of its strategy to generate sufficient revenues and its ability to raise additional funds on reasonable terms and conditions,
there can be no assurances to that effect. The ability of the Company to continue as a going concern depends upon the Company’s
ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public
or private offering. There can be no assurance the Company will be successful in any future fund raising. In the event that the Company
requires additional funding to finance its operations, Based on the Company’s most recent cash flows projection and working
capital requirements, management of the Company believes that the Company will be able to continue to operate as a going concern in the
foreseeable future and it will have sufficient working capital to meet its operating needs for at least the next 12 months.
Significant Accounting Policies
Please refer to our significant accounting
policies in Note 2 to our CFS.
Results of Operations
Comparison of the nine months ended
March 31, 2022 and 2021
The following table sets
forth the results of our operations for the nine months ended March 31, 2022 and 2021, respectively, indicated as a percentage of net
sales. Certain columns may not add up due to rounding.
| |
2022 | | |
% of Revenues | | |
2021 | | |
% of Revenues | |
Revenues | |
$ | 16,294,147 | | |
| | | |
$ | 152,925 | | |
| | |
Cost of revenues | |
| 15,395,849 | | |
| 94 | % | |
| 66,925 | | |
| 44 | % |
Gross profit | |
| 898,298 | | |
| 6 | % | |
| 86,000 | | |
| 56 | % |
Selling expenses | |
| 612,253 | | |
| 4 | % | |
| 295,252 | | |
| 193 | % |
Research and development | |
| 968,403 | | |
| 6 | % | |
| 537,009 | | |
| 351 | % |
General and administrative expenses | |
| 3,990,789 | | |
| 24 | % | |
| 2,377,257 | | |
| 1,555 | % |
Total operating expenses | |
| 5,571,445 | | |
| 34 | % | |
| 3,209,518 | | |
| 2,099 | % |
Loss from operations | |
| (4,673,147 | ) | |
| (29 | )% | |
| (3,123,518 | ) | |
| (2,043 | )% |
Non-operating income (expense), net | |
| 50,647 | | |
| 0.3 | % | |
| (20,244 | ) | |
| (13 | )% |
Loss before income taxes | |
| (4,622,500 | ) | |
| (28 | )% | |
| (3,143,762 | ) | |
| (2,056 | )% |
Income tax expense | |
| - | | |
| - | % | |
| - | | |
| - | % |
Loss before noncontrolling interest | |
| (4,622,500 | ) | |
| (28 | )% | |
| (3,143,762 | ) | |
| (2,056 | )% |
Less: loss attributable to noncontrolling interest | |
| (226,561 | ) | |
| (1 | )% | |
| (93,902 | ) | |
| (62 | )% |
Net loss to the Company | |
$ | (4,395,939 | ) | |
| (27 | )% | |
| (3,049,860 | ) | |
| (1,994 | )% |
Revenues
The total revenue of $16,294,147
and $152,925 was generated for the nine months ended March 31, 2022 and 2021, respectively, which shows a $16,141,222 or 10,555% increase
by comparing with the same period of last fiscal year. The increase in the revenue for the nine months ended March 31, 2022 was mainly
due to the expansion of 5G messaging business, especially 5G SMS, integrated 5G IMMCP and 5G multi-media video messaging technology system
(“Value-added service”). The income is based on the fee charged for number messages sent. The Integrated 5G message marketing
cloud platform (“5G IMMCP”), based on the current demand in the Chinese market, expands connection with existing clients through
accesses such as SMS, email, WeChat, applet, APP Push and third-party tools and manages users from different platforms all in one 5G IMMCP
to form the company’s unique product service capabilities and competitive advantages. In the same period of the last fiscal year, sales
were solely from smart city business including face recognition terminals and related devices to schools or residential communities in
China.
From July 2021 to March
31, 2022, the Company generated revenue of $16,294,147, consisting of 5G business with an amount of $15,153,166, including $11,849,585
from 5G SMS, $3,303,581 from 5G IMMCP mobile projects on the cloud as value-added service; $1,104,445 from advertising service and $36,536
from smart city projects. The Company’s three major business lines have started full operations.
One reason the revenue increased rapidly is because
the investment on R&D for providing a wide-range of products to solve the problems of the customer needs. Also, the high growth artificial
intelligence adoption penetration rate creates a tremendous demand for 5G messaging. In addition, the Company’s marketing strategy
is effectively and efficiently for reaching the target customers from different industry. Even more, the brand recognition with strong
customer loyalty is so helpful to retain old customer meanwhile developing new market across the country.
Cost of Revenues
We had $15,395,849 and
$66,925 cost of revenues for the nine months ended March 31, 2022 and 2021, respectively, which shows a $15,328,924 or 22,905% increase
by comparing with the same period of last fiscal year. For the nine months ended March 31, 2022, cost of revenues was mainly the SMS service
platform fees to suppliers. For the nine months ended March 31, 2021, cost of revenues was the inventory purchase for the products sold.
The increase in cost of revenues was mainly due to the expansion into the 5G messaging business and the delivery of services related to
the SMS service platform in 2022.
Operating costs incurred
from July 2021 to March 2022 were $15,395,849, and cost of 5G messaging service was $14,378,998 including $11,534,435 for 5G SMS, $2,844,563
for 5G IMMCP and mobile on cloud projects; $995,491 from advertising service, and $21,360 for smart city projects. These costs were the
service procurement costs corresponding to the full operation of the three business lines of the Company. Among them, 5G messaging business
has entered a period of rapid growth, and cost of procurement accounts for 80% of the overall procurement cost.
Gross Profit
Gross profit for the nine
months ended March 31, 2022 was $898,298 compared to gross profit of $86,000 for the nine months ended March 31, 2021, respectively, which
shows a $812,298 or 945% increase by comparing with the same period of last fiscal year. The generation of gross profit was mainly due
to the delivery of services related to the SMS service in 2022.
From July to March 2022,
the overall gross profit margin was 5.51%, including 5.43% for 5G SMS, 5G IMMCP and mobile projects on cloud, and 41.54% for smart community
projects. The Company’s smart city business continues to develop. It generates revenue and maintains relatively stable gross profit
level.
Currently, the overall
gross profit margin of the Company is low due to the following reasons:
The majority revenue of
the Company from July to March 2022 was mainly generated by 5G SMS and 5G IMMCP value-added services. The sales of digital smart city
service was only accounted for a very tiny portion while the acoustic intelligence segment is still in the process of product development
which hasn’t contributed any income this quarter.
For 5G SMS and 5G IMMCP
and value-added services, the Company formally entered the 5G messaging and its related business market last fiscal year. As the 5G messaging
industry is still in an early stage, to attract the initial users, undercut competitions and gain market share as early as possible, the
Company adopted a competitive pricing strategy to expand the first-mover advantage. As a result, Shuhai Beijing has been engaged by nearly 200
institutional clients for services, including establishing cooperation relationships with industry-leading customers such as the top three
tech giants China mobile, and China telecom subsidiary.
As the Company proceeds
into the later stage of the 5G messaging business, three factors will help equip the Company with more flexibility in pricing and improving
the gross margin: 1) costs will be reduced by economic of scale over a larger number of customers basis and the increase of production
2)By adopting differentiation strategy, growing brand recognition and customer loyalty will strengthen the Company’s pricing power;
3) after the commercialization of 5G messaging in the Chinese market (expected in the second quarter of 2022), the target customers and
product forms will be expanded. For example, the Company will provide the 5G IMMCP as SaaS software, customization and value-added services
to improve profit margin.
Selling, General and Administrative, and
Research and Development Expenses
Selling expenses were
$612,253 and $295,252 for the nine months ended March 31, 2022 and 2021, respectively, which shows a $317,001 or 107% increase by comparing
with the same period of last fiscal year. The increase of $317,001 was mainly due to increase in payroll expense related to salespersons
of $274,900, increase in technology service fees of $18,600, increase in marketing expense by $11,000,increase in travel expense of $7,400
and increase in transport fee by $4,800. As mentioned, during past three quarters, the majority of revenue was generated by 5G Messaging
with the strategy of sharing a higher portion of income with partners from the fee charged through each message has been sent Indeed,
in order to expand the sales channel especially acoustic intelligence domestically & internationally, the investment on promotions,
distributors, global exhibitions, and related activities will be increased. As the result, the selling expense to total sales is expected
to be around the mid-range of industry average for high-growth technology business.
The Research & Development
cost mainly consists of innovation & creation in both software and hardware to assist communities for addressing safety issues with
public health concerns during the COVID-19 pandemic, expanding the Company’s leading acoustic intelligent application technologies,
and continuing to develop 5G-related products. We incurred R&D expenses of $968,403 and $537,009 during the nine months ended March
31, 2022 and 2021, respectively; a $431,394 or 80% increase on R&D investment. Due to the corporate and business strategies of establishing
a spearhead position in the acoustic intelligence segment worldwide, the proper amount of capital budgeting on technological development
will be invested over the next three years. Datasea aims to obtain the most critical patents (PCT) especially for the innovation category
in acoustic intelligence in order to better solve customers’ demand and to better transfer intangible assets into economic values.
By doing so, the joint research hubs with enterprises possess advanced R&D team both onshore and offshore will be setting up. In addition,
the patents that Datasea is pursuing fall into the categories of “innovation” and PCT (Patent Cooperation Treaty) which are
administered by World Intellectual Property Organization and are recognized globally.
The 4.0 version of 5G
MMCP, which is Integrated 5G IMMCP, has been developed in three phases so far. The development cost paid was $500,000.
5G IMMCP connects with
existing client promotion access such as SMS, email, WeChat, applet, APP Push and third-party tools, provides unified messaging and manages
aggregated messaging business capabilities.
5G IMMCP mainly targets:
Customers with three or more reach channels, membership system, annual marketing budget of more than RMB50,000 (approximately $7,860)
and private operating needs, mainly including government agencies, hospitals, universities and other public institutions with a large
demand for notification. 5G IMMCP also aims to meet a large number of marketing needs, private domain operation needs with three to ten
stores in the midstream sector (such as eating and drinking physical store chain merchants), online and offline multi-channel operation
of brand merchants.
General and administration
(“G&A”) expenses increased $1,613,532 or 68% from $2,377,257 during the nine months ended March 31, 2021 to $3,990,789
during the nine months ended March 31, 2022. The increase is attributed to increase in rental expenses by $342,800, increase in payroll
expenses by $667,400, increase in bad debt expense by $280,900, increase in property management fee by $85,500, increase meal and entertainment
expense by $65,500 and increase in professional fees by $186,200, which was partly offset by decreased other G&A expenses by $15,100.
The company’s setting
up subsidiaries in Hangzhou and Shenzhen increased rent and personnel expenses. In addition, for financing and business expansion, the
Company has invested in legal, investment and other professional services to meet the compliance requirements of the Securities and Exchange
Commission.
Non-operating Income (Expenses), net
Non-operating income was
$50,647 for the nine months ended March 31, 2022, consisted mainly of interest income $37,730 and other income $12,917. For the nine months
ended March 31, 2021, non-operating expenses was $20,244, consisted mainly of other expense $22,160, partially offset by interest income
$1,916.
Net Loss
We generated net losses
of $4,395,939 and $3,049,860 for the nine months ended March 31, 2022 and 2021, respectively, which shows a $1,346,079 or 44% increase
by comparing with the same period of last fiscal year. The increase in net loss was due mainly to the increase in operating expenses which
partly offset by increase in gross profit as explained above.
During the fiscal year
ending June 30, 2022, the Company will continue to improve the market expansion of its main business, based on existing contracts including
smart campuses/canteen systems, smart community systems, 5G messaging, and the market launch of acoustic smart hardware products. The
Company’s objective is to expand our revenue streams and achieve annual profit in the new fiscal year.
At present, the Company
has completed the new strategic positioning and business layout by 2022, forming three main businesses and long-term development plans
in smart city, acoustic intelligence and 5G messaging. According to the plan, in 2022, with the introduction of acoustic intelligent hardware
products and solutions into the market, and the comprehensive commercialization of China’s 5G messaging services in the Chinese
market (the Company has signed service agreements with mobile operators, and the development of 5G messaging applications by leading companies
in express delivery, catering, medical and tourism industries). More than $17.05 million worth of 5G messaging business contracts have
been signed.
Debt to equity ratio
The debt to equity ratio is 1.57 and 49.12 as of
March 31, 2022 and June 30, 2021 respectively, which proved better management on credit sales and credit procurement.
Comparison of the three months ended
March 31, 2022 and 2021
The following table sets
forth the results of our operations for the three months ended March 31, 2022 and 2021, respectively, indicated as a percentage of net
sales. Certain columns may not add up due to rounding.
| |
2022 | | |
% of Revenues | | |
2021 | | |
% of Revenues | |
Revenues | |
$ | 6,643,538 | | |
| | | |
$ | 17,686 | | |
| | |
Cost of revenues | |
| 6,055,134 | | |
| 91 | % | |
| 9,912 | | |
| 56 | % |
Gross profit | |
| 588,404 | | |
| 9 | % | |
| 7,774 | | |
| 44 | % |
Selling expenses | |
| 225,262 | | |
| 3 | % | |
| 121,216 | | |
| 685 | % |
Research and development | |
| 248,832 | | |
| 4 | % | |
| 207,774 | | |
| 1,175 | % |
General and administrative expenses | |
| 1,372,509 | | |
| 21 | % | |
| 945,285 | | |
| 5,345 | % |
Total operating expenses | |
| 1,846,603 | | |
| 28 | % | |
| 1,274,275 | | |
| 7,205 | % |
Loss from operations | |
| (1,258,199 | ) | |
| (19 | )% | |
| (1,266,501 | ) | |
| (7,161 | )% |
Non-operating income (expense), net | |
| 12,507 | | |
| 0.2 | % | |
| (9,846 | ) | |
| (56 | )% |
Loss before income taxes | |
| (1,245,692 | ) | |
| (19 | )% | |
| (1,276,347 | ) | |
| (7,217 | )% |
Income tax expense | |
| - | | |
| - | % | |
| - | | |
| - | % |
Loss before noncontrolling interest | |
| (1,245,692 | ) | |
| (19 | )% | |
| (1,276,347 | ) | |
| (7,217 | )% |
Less: income (loss) attributable to noncontrolling interest | |
| 31,720 | | |
| 0.5 | % | |
| (57,347 | ) | |
| (324 | )% |
Net loss to the Company | |
$ | (1,277,412 | ) | |
| (18 | )% | |
| (1,219,000 | ) | |
| (6,892 | )% |
Revenues
We had revenues of $6,643,538
and $17,686 for the three months ended March 31, 2022 and 2021, respectively, which shows a $6,625,852 or 37,463% increase by comparing
with the same period of last fiscal year. The increase in revenues was mainly due to the expansion of the Company’s business towards
5G messaging in fiscal year 2021. For the three months ended March 31, 2022, revenues mainly consisted of service fees from our 5G SMS
service platform. For the three months ended March 31, 2021, revenues mainly consisted of sales of face recognition terminals and related
devices to schools and residential communities in China.
Cost of Revenues
We recorded $6,055,134
and $9,912 cost of revenues for the three months ended March 31, 2022 and 2021, respectively, which shows a $6,045,222 or 60,989% increase
by comparing with the same period of last fiscal year. For the three months ended March 31, 2022, cost of revenues was mainly the 5G SMS
service platform fees to suppliers. For the three months ended March 31, 2021, cost of revenues was inventory purchase cost for the products
sold. The increase in cost of revenues was due mainly to the expansion into the 5G messaging business and the delivery of services related
to the 5G SMS service platform in 2022.
Gross Profit
Gross profit for the three
months ended March 31, 2022 was $588,404 compared to $7,774 for the three months ended March 31, 2021, respectively, which shows a $580,630
or 7,469% increase by comparing with the same period of last fiscal year. The increase in gross profit was mainly due to the delivery
of services related to the 5G SMS service platform in 2022.
Selling, General and Administrative, and
Research and Development Expenses
Selling expenses were
$225,262 and $121,216 for the three months ended March 31, 2022 and 2021, respectively, representing an increase of $104,046 or 86%. The
increase was mainly due to the increase in payroll expense of salespersons by $114,500, partly offset by a decrease office expenses by
$8,100 and decrease travel expense by $1,500.
Currently, we are focusing
on developing products and software to assist schools and communities in addressing safety issues and public health issues during the
pandemic, expanding the Company’s leading acoustic intelligent application technologies and products, and continuing to develop
5G-related applications. We incurred R&D expenses of $248,832 and $207,774 during the three months ended March 31, 2022 and 2021,
respectively, which shows a $41,058 or 20% increase by comparing with the same period of last fiscal year. We intend to invest approximately
$10 million in technological product development over the next three years.
General and administration
expenses increased $427,224, or 45% from $945,285 during the three months ended March 31, 2021 to $1,372,509 during the three months ended
March 31, 2022. The increase was mainly attributed to the increase in professional fees by $101,200, increased rent expense by $92,300,
increased stock compensation expense by $198,000 and increased lawyer fee by $36,000.
Non-operating Income (Expenses), net
Non-operating income was
$12,507 for the three months ended March 31, 2022, consisting mainly of interest income of $4,837 and other income of $7,670. For the
three months ended March 31, 2021, non-operating expenses of $9,846 is consisted of other expense $9,958, partially offset by interest
income of $112.
Net Loss
We generated net losses
of $1,277,412 and $1,219,000 for the three months ended March 31, 2022 and 2021, respectively, which shows a $58,412 or 5% increase by
comparing with the same period of last fiscal year. The increase in net loss was mainly due to the increase in operating expenses, partly
offset by increased gross profit as explained above.
Liquidity and Capital Resources
Historically, we have
funded our operations primarily through the sale of our common stock and shareholder loans. To enhance our ability to continue to operate
as a going concern, we are dedicating resources to generate recurring revenues and sustainable operating cash flows. Given the development
of 5G technology in China, we believe there is great demand for our acoustic intelligent technology and products. We believe our business
will benefit from the increasing demand for public safety in China, as well as increasing demand for our smart community, safe campus,
and smart payment solutions.
We expect to generate
revenues through expanding our current smart city, 5G messaging and acoustic intelligence business, and through continuous product innovation
and development as well as various types of value-added services. In order to maintain working capital sufficient to support our operations
and finance the future growth of our business, we expect to fund any cash flow shortfall through financial support from our majority stockholders
(who are also our board members or officers) and public or private issuance of securities. However, such additional cash resources may
not be available to us on desirable terms, or at all, if and when needed by us.
As of March 31, 2022,
we had working capital of $1,613,000 or a current ratio of 1.26:1. Our current assets were $7,845,542. As of June 30, 2021, we had a working
capital deficit of $2,372,682 or a current ratio of 0.27:1. Our current assets were $885 ,985.
We expect the Company
to continue to support its ongoing operations and financing through revenue growth and increased financing activities in business areas
such as 5G messaging. However, there is no assurance that the Company will be able to secure such additional working capital on commercially
viable terms or at all.
The following is a summary
of cash provided by or used in each of the indicated types of activities during the nine months ended March 31, 2022 and 2021, respectively.
| |
2022 | | |
2021 | |
Net cash used in operating activities | |
$ | (4,216,488 | ) | |
$ | (3,061,955 | ) |
Net cash used in investing activities | |
$ | (496,744 | ) | |
$ | (128,988 | ) |
Net cash provided by financing activities | |
$ | 6,204,183 | | |
$ | 1,659,824 | |
Cash Flow from Operating Activities
Net cash used in operating
activities was $4,216,488 during the nine months ended March 31, 2022, compared to net cash used in operating activities of $3,061,955
during the nine months ended March 31, 2021, an increase in cash outflow of $1,154,533. The increase in cash outflow was mainly due to
increased cash outflow on accounts receivable by $5,457,080, increased cash outflow on payment of lease liability by $94,372 and increased
cash outflow on prepaid expenses and other current assets by $131,790, which was partly offset by increased cash inflow from accounts
payable by $4,573,672.
Cash Flow from Investing Activities
Net cash used in investing
activities totaled $496,744 for the nine months ended March 31, 2022, which consists of cash paid for the acquisition of office furniture
and equipment of $32,188, cash paid for acquisition and development of software of $402,118, and long-term investment into two high-tech
companies of $62,438. Net cash used in investing activities totaled $128,988 for the nine months ended March 31, 2021, which primarily
was for cash paid for the acquisition of office furniture and equipment and leasehold improvements of $103,054, and for intangible assets
of $25,934.
Cash Flow from Financing Activities
Net cash provided by financing
activities was $6,204,183 during the nine months ended March 31, 2022, which was the net proceeds from sale of our common stock through
an equity financing of $7,681,796 and proceeds from capital contribution from a major shareholder of $62,438, but offset by decrease in
due to related parties of $40,760, and repayment of loans payable of $1,499,291. Net cash provided by financing activities was $1,659,824
during the nine months ending March 31, 2021, which was the net proceeds from sale of our common stock through an equity financing of
$931,000 and proceeds from loan payable of $728,824.
Going forward
Datasea is in the
stage of becoming a well-known multinational conglomerate by providing cutting-edge artificial intelligence globally to better build the
digital world. To achieve this objective, management of the Company plans to:
| ● | Strengthen the acoustic intelligence business operation in
the U.S for design, innovation, supply chain management, sales, and capitalization in order to reinforce the leadership position globally; |
|
● |
Develop new products for wider range of application layers, upgrade current service on 5G messaging business, and promote aggressively for seizing up market share; |
|
● |
Reinforce comparative advantages especially differentiation strategy by fully matching internal resources and capabilities with opportunities rising externally; |
|
● |
Continue to team up with domestic and international top tier technology institutions for research & development to adhere in the growth stage of industry life cycle persistently through driving up demand by supply side innovation; |
| ● | Sales will be expanded globally and core products will be
localized for the purpose of better meet customers’ demand; |
| ● | Vertical integration through establishing production lines
to take advantage of economic scale & scope for cost advantages; |
|
● |
According to the dynamic economic condition, take advantage of different monetary policy around the world, optimize capital structure for lowering cost of financing; |
|
● |
Create strategic alliance with potential partners to create mutual synergy in form of merger & acquisition or joint venture; |
|
● |
Enhance brand awareness by marketing and obtain PCT international patents to boost up the value of intangible assets; |
|
● |
Maintain clients’ loyalty by providing outstanding customer service, exclusive service experience, and appropriate transparency and publicity. |
Off-Balance Sheet Arrangements
There are no off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial
condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.